NRG Energy, Inc. (NRG) Earnings

Management highlights

### Core Strategy - NRG's core strategy for large new power demand (such as AI/data centers) requires matching new demand with new, customer-backed generation to avoid shifting investment costs to existing retail customers, protect the grid, and strengthen communities. This "bring your own power" (BYOP) model is increasingly aligned with current policy direction. - The company has aligned on principal commercial terms for its first BYOP project: a 1.2 gigawatt combined cycle gas plant in Texas developed for a leading global investment-grade AI/cloud hyperscaler, with an option to expand the project to 2.4 gigawatts. The project is designed to deliver more generation than the data center requires to support Texas' reliability goals, and NRG will develop, own, and operate the facility. ### BYOP Project Commercial and Financial Details - The commercial structure has two components: an availability-based capacity payment to recover invested capital and deliver required returns, and a separate operating payment to recover fuel and plant operating costs. 95% of the project's free cash flow will be supported by capacity payments independent of data center utilization, so returns are fixed upfront and not dependent on merchant power or natural gas prices. The customer's commitment is backed by an investment-grade parent guarantee. - Total planned investment for the 1.2 gigawatt project is $3.2 billion. At full operation, the project is expected to generate $500 million annual adjusted EBITDA and $375 million annual free cash flow before growth, with a pre-tax unlevered IRR in NRG's target 12% to 15% range. Commercial operation is targeted for late 2029, with an initial contract term of at least 15 years. - The project will deliver an estimated 1,400 high-paying construction jobs, 30 permanent plant roles, and significant new local tax revenue for governments and schools. NRG and the customer are committed to responsible water stewardship and collaboration with local stakeholders. ### Broader Growth Pipeline and Opportunity - NRG has secured 5.4 gigawatts of turbine and EPC capacity through 2032 via GE Vernova and Kiewit, with the broader development pipeline more than doubling this secured capacity, and every turbine slot tied to active customer discussions. The company also has ~2 gigawatts of upgrade opportunities across its PJM fleet. - If the current 1.2 gigawatt project proceeds and additional pipeline opportunities are executed, long-term contracted and capacity revenue could support 95% of the midpoint of 2026 company-wide free cash flow guidance by 2033, materially improving the quality of NRG's cash flow. The core business is still expected to deliver 14%+ adjusted EPS CAGR through 2030, with BYOP projects representing additional upside. - All new projects will be required to meet standalone risk-adjusted return hurdles, and NRG will not sacrifice discipline for scale. ### Second Quarter 2026 Core Results - Q2 2026 adjusted EBITDA was $1.2 billion, up $308 million (34%) year-over-year. Free cash flow before growth was $1.025 billion, up $111 million year-over-year. Adjusted net income was $315 million ($1.49 adjusted EPS), down from $339 million ($1.73 adjusted EPS) year-over-year, as higher acquisition-related interest and depreciation/amortization offset higher EBITDA, an expected dynamic during the current deleveraging period.

Guidance

- NRG is maintaining its full-year 2026 financial guidance ranges. While softer Texas load/power prices and higher winter storm-related supply costs have left first-half 2026 results tracking below the midpoint of guidance ranges, this is due to temporary weather and market conditions, not underlying business weakness, which was accounted for when guidance was set. - The 2026 capital allocation plan is updated to add a $721 million expected investment category for the Texas BYOP project; $40 million of this was previously classified in other plant investments, with $681 million of incremental spend funded by reducing planned liability management (resulting in lower net debt reduction in 2026 than originally planned). All other elements of the 2026 capital allocation plan remain unchanged. - NRG reaffirms its unchanged commitment to return at least $1 billion annually to shareholders via share repurchases, with 2026 full-year guidance of $1 billion in share repurchases and $407 million in common dividends. Upsizing the repurchase program would only be considered if excess incremental free cash flow is available after project spending. - NRG's long-term net leverage target of 3x remains unchanged. On-balance sheet funding of the current project would push the target achievement date from 2028 to 2029, with gradual deleveraging still occurring throughout the construction period.

Segment performance

- Texas: Adjusted EBITDA declined $131 million year-over-year, primarily due to lower load and power prices. ERCOT Houston around-the-clock prices averaged $33 per megawatt hour (8% lower year-over-year, well below the 2026 planning assumption of $52.00 per megawatt hour), limiting optimization and generation opportunities for the fleet. No revenue contribution percentage was provided. - East: Adjusted EBITDA increased $370 million year-over-year, driven almost entirely by the contribution from the portfolio acquired from LS Power. Near-term benefits from higher PJM power prices were offset by pre-existing hedges on the acquired assets, higher retail supply costs, and an estimated $70 million 2026 incremental cost from Virginia rejoining the Regional Greenhouse Gas Initiative (RGGI), which was not included in original underwriting. No revenue contribution percentage was provided. - West: Adjusted EBITDA increased $27 million year-over-year, primarily due to lower operating expenses following the expiration of a facility lease in the prior year. No revenue contribution percentage was provided. - Smart Home: Adjusted EBITDA increased $42 million year-over-year, driven by continued customer growth and higher recurring service margins per customer. The segment ended the quarter with 2.45 million total customers, an 8% year-over-year increase, with growth outpacing long-term outlook assumptions. No revenue contribution percentage was provided.

Risks & headwinds

- Final investment decision for the 1.2 gigawatt Texas BYOP project is subject to customary conditions, including remaining commercial negotiations, land-related matters, and required internal approvals; negotiations are ongoing and not yet finalized. - Lower-than-expected ERCOT power prices and demand have reduced Texas segment earnings in the first half of 2026, and forward power prices in ERCOT have not yet reflected expected medium-term generation demand, creating near-term earnings pressure. - Pre-existing hedges on the acquired LS Power portfolio limit near-term upside from current higher PJM power prices, with some below-market hedges extending into 2027. - Virginia's 2026 reentry into RGGI will create an unanticipated $70 million incremental cost in 2026 for the 1.2 gigawatts of affected Virginia assets in the LS Power portfolio.

Analyst Q&A

• Q: What is the expected cadence of incremental 1.2 gigawatt BYOP project chunks, what is the return outlook for future projects, and how does the Texas governor's recent stance on data center growth impact this project's timeline?

  A: Returns for all future BYOP projects are expected to stay within the 12-15% pre-tax unlevered IRR target range, just like the current 1.2 gigawatt project. Additional 1.2 gigawatt projects are expected to come online serially, with one new commercial operation date per year starting after the 2029 COD of the first project. The current project aligns with Texas policymakers' concerns by adding more generation than required and not straining the grid, and the 2029 COD gives ample time for regulatory processes to play out.

• Q: Why announce principal terms now, what approvals are still outstanding, and can you share the credit rating of the investment-grade counterparty?

  A: Management announced progress now to keep shareholders informed of the commercial structure and strategy execution on secured turbine/EPC capacity. Principal commercial terms are agreed, but final contract negotiations, land matters, and internal approvals are still outstanding; management will not provide a fixed timeline for completion, and will update investors when material progress is made. Management declined to share the specific credit rating of the counterparty, only confirming the counterparty is investment-grade.

• Q: How does the capital partnership option impact balance sheet strategy and shareholder returns?

  A: The current base plan is to fund the entire project on-balance sheet, which only pushes the 3x leverage target one year later to 2029, with continued gradual deleveraging throughout construction. If an attractive capital partnership structure is agreed, it would create additional balance sheet capacity that would most likely be used to increase the annual share repurchase program. Detailed partnership discussions will begin in earnest now that a firm contract is largely aligned.

• Q: How much of the 2 gigawatt PJM upgrade opportunity is economic under the current $555 per megawatt day procurement cap?

  A: Management estimates less than half of the 2 gigawatt opportunity would be pursued through the capped auction process, with the remainder being pursued via long-term bilateral contracts. All upgrades will only be executed if they deliver long-term durable cash flows meeting NRG's return hurdles.